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15.03.2007 Feature Article

IS THE RE-DENOMINATION OF THE CEDI NECESSARY

According to investopaedia, re-domination is
1. The process whereby a country's currency is re-calibrated due to significant inflation and currency devaluation
2. The process of changing the currency value on a financial security, eg. The Bulgarian lev was re-denominated due to inflation arising at the end of the Second World War. After the re-denomination, one “new” lev was equal to100 “old” lev. The lev was re-denominated three times in the twentieth century.

According to Databank research desk, currency re-denomination refers to the situation whereby the currency administration of a country (i.e. the government or an independent central bank) decides to re-calibrate the respective country's currency. Currency re-denomination does not affect intrinsic value of the respective currency hence the purchasing power of the currency is not affected in any way. A myriad of countries have re-denominated their currencies in the past, and some countries have done so more than one occasion. (ie Brazil (6 times), Yugoslavia(5), Argentina(4). Re-denomination goes as far back as the nineteenth century, where some countries adjusted the value of their coins when they were faced with gold and silver shortages. Ghana despite going through various currency reforms in its history, has never re-denominated its currency.

According to Brazilian government, during a redenomination process, the new unit is often the same as the old unit, with the addition of the word "new". The word "new" may or may not be dropped a few years after the change. Sometimes the new unit is a completely new name, or a "recycled" name from previous redenomination or from ancient times.
"The re-denomination," according to the Governor, "will free the economy to do business in the most efficient way, based on the cedi as a means of exchange; and with continued commitment to prudent and \disciplined economic policies, would serve as a store of value for all, both within and outside of the banking system…A sound monetary unit is indispensable for growth and prosperity, and for the quest to become an emerging market economy and a nation of middle-income status," Dr. Paul Acquah said.

However, some reasons why re-denomination takes place include book-keeping and statistical difficulties, price tagging difficulties at shops and supermarkets etc. Possible reduced cost of pricing our currency and many others.

In as much as possible, there are diverse benefits associated with currency re-denomination.
To begin with, it will free the economy to do business in the most efficient way based on the cedi as a means of exchange; and with continued commitment serve as a store of value for all, both within and outside of the banking system.
More so, a sound monetary unit is indispensable for growth and prosperity and for the quest to become an emerging market economy and a nation of middle income status. Example, the reserve Bank of Zimbabwe slashed the country's currency by three zeros as part of measure to fight inflation, corruption, speculation and indiscipline that has gripped the economy. The RBZ governor, Dr. Gono gave depositors a 21- day deadline to change their money after which the old bearer cheque ceased to be legal tender.
Re-denomination would enhance book- keeping and simplify business transactions across board. The country will also experience a consistent fair distribution of food stuffs over the years thus keeping inflation in check, carry few but very valuable currency notes and coins to facilitate business.

The most telling economic implication of conducting a currency re-denomination exercise is that it helps to increase confidence in the economy and sends a signal to both the local community and the international markets that high inflation and general macro-economic instability are a thing of the past. Re-denomination becomes effective when there is an expected reduction in inflation and also reduces the dead weight burden the current cedi value places on the economy. Historical analysis suggests that re-denomination had been very successful in an environment of micro-economic stability that is, declining inflation, stable exchange rates, fiscal prudence and well-anchored expectation of policy credibility”

Besides, when citizens of a country lose confidence in their local currency, they may begin to use foreign currencies. When this happens, the central bank no longer controls the money supply. This makes it impossible for the central bank to play one of its key roles, which is to act as a lender of last resort to deposit money Banks (DMBs), which may lead to lack of confidence in the financial system. Economic policies is also affected by currency substitution because the central bank or government (depending on whether central bank is independent or not) loses control of its ability to use monetary as an economic policymaking instrument, leaving economic policy to be influenced instead by other central banks and international financial markets. The gravity of the situation is more pronounced when citizens completely substitutes their currency for another currency (full dollorization).

I n July 2007,the Bank of Ghana (BoG) is planning to re-denominate the cedi and intends to do so by setting ten thousand cedis to one new Ghana cedi (GH¢) which in turn will be equal to one hundred Ghana Pesewa (Gp). This in effect would knock off our zeros off the local currency. New notes and coins would be issued to replace the existing notes and coins over a period of six months. The old notes and coins will be in physical circulation together with the new notes and coins during the six months transition period hence prices and fees of goods and services would have to be quoted in both the old and new currencies over the transition period. After the transition is over, the old notes and coins would cease to be legal tender, although one would be able to convert them at the Bank of Ghana or at any Deposit Money Bank (DMB). When everything is over and the new notes are in circulation the "Ghana Cedi" will revert to being referred to as the Cedi. Eg:
GH ¢50 = ¢500,000
GH ¢20 = ¢200,000
GH ¢10 = ¢100,000
50Gp = ¢5,000
20Gp = ¢2,000
10Gp = ¢500
1Gp = ¢100

As part of the efforts to make this initiative very successful, the Ministry of Information and National Orientation on behalf of the government has plans to involve fully in the aspect of education. This will be undertaken by the use of Information Vans which will be paraded throughout the entire country to inform the masses in order to make them appreciate the initiative.

In conclusion, the numerous benefits associated with the redenomination process need urgent attention by the entire population both literate and the semi-literate considering the ease of burdenweight, simplification of accounting records and the ease of expressing monetary values, significant gains in cost of banknote production, efficiency in payment systems, in particular ATMs, significant reduction in transactions volume, facilitating the introduction of the use of vendor machines and car parking meters and many more which should not be overlooked.
Samuel Laryea
Samuel Laryea, © 2007

This author has authored 5 publications on Modern Ghana. Author column: SamuelLaryea

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